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Yesterday VIX hit 35 on a 5% pullback from yearly highs. Today it's back to 23. |
Most traders see that as "crisis averted." |
I see it as proof this market is completely broken. |
When Volatility Goes Insane |
Look, I've been trading for over 25 years. I stood on the floor when real crashes happened. I've seen VIX hit 89 during actual market destruction. But yesterday? Yesterday was something else entirely. |
We were down 5% from the yearly highs. That's it. Not 5% in a day - 5% from the top. In the old days, that wasn't even a correction. That was profit-taking. Normal market behavior. |
But VIX exploded to 35 like we were facing financial Armageddon. |
Then today - 24 hours later - it's back to 23 like nothing happened. |
A 5% pullback from highs generating VIX 35 readings? That's not market fear - that's market dysfunction. |
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The Oil Round-Trip Says Everything |
While S&P traders were having their little pullback tantrum, oil moved from $81 to an intraday high of $119 in a single session. That's a $28 move - about 35% in one day. |
Today? Oil's back to 84. Almost exactly where it started. |
So let me get this straight: Oil had a massive 35% spike and complete reversal, gold ripped higher, commodities went ballistic, the S&P had a normal 5% pullback from highs, and somehow this justified VIX exploding to 35? |
Nothing fundamentally changed. Oil's right back where it was. S&P is off its highs by a normal amount. Yet we had volatility readings that typically show up during actual financial crises. |
That's not correlation. That's algorithmic insanity. |
The Machine Problem |
This is what happens when machines do most of the trading. They don't understand context. They see volatility in one asset class and immediately start hedging across all asset classes. |
Yesterday, oil volatility bled into equity volatility even though there was no fundamental reason for U.S. stocks to panic. A 5% pullback from highs is routine market behavior. But the machines don't care about routine - they just see standard deviations moving and start throwing hedges everywhere. |
Oil spikes 35%? Hedge everything. Doesn't matter that oil's going right back down the next day. |
That's why you get VIX 35 on what should have been a garden-variety pullback. The fear isn't coming from equity fundamentals. It's coming from cross-asset correlation algorithms that treat every volatility spike like the apocalypse. |
What This Means for Traders |
When I'm looking at this market now - VIX back to 23, oil back to $84, S&P still just off its highs - I'm not thinking "all clear." I'm thinking "this is going to happen again." |
Because nothing got fixed. The underlying machine-driven correlation is still there. The next time we get any commodity shock or bond market hiccup, the same algorithmic overreaction is going to slam equity volatility. |
We're trading in a market where traditional relationships don't work. Where routine pullbacks can trigger panic-level fear metrics. Where massive volatility spikes can reverse in 24 hours because nothing fundamentally changed in the first place. |
How to Trade the Broken Market |
First, throw out your old volatility playbook. VIX readings don't mean what they used to when machines are driving cross-asset panic. |
Second, watch for these algorithmic overreactions. When oil or commodities start moving big, expect equity volatility to spike regardless of whether it makes sense. Then expect it to reverse just as fast when the commodity move reverses. |
Third, shorten your time horizons dramatically. In a market where VIX can move from 35 to 23 while oil goes from $119 back to $84, holding positions based on traditional volatility patterns is suicide. |
The New Abnormal |
Yesterday's action wasn't an anomaly - it was a preview of our new market structure. Volatility explosions that make no fundamental sense, followed by rapid reversals when the machines realize nothing actually broke. |
Welcome to the machine-driven market. Logic not included. |
To your success, |
Don Kaufman |
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